Deficit financing and economic development. Deficit Financing: Meaning, Effects and Advantages 2019-02-16

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Economic Impacts of Deficit Financing

deficit financing and economic development

That is borrowing from the public and from the commercial banks. The prices of essential goods should be controlled. But in the mid-50 s, the central bank started warning the government about the impact of deficit financing on inflation. It results merely in the transfer of purchasing power from the hands of the public to the government without a net addition to total money supply. As a result, inflationary effect will be neutralized. For example if people hold or save all the created money then there will be no inflationary pressure.

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Deficit Financing

deficit financing and economic development

Formulation of Import and Export Policy :- A country should frame its import and export policy in such a manner that the supply of an essential goods may not fall. Deficit financing can give a boost to the development process. It may generate inflationary situations and even shake the confidence of the people in the stability of the economy. Efforts should be taken to mop up surplus money thus injected for new part. A government can enforce such monetary measures whichdiscourage the non-essential private investment and encourage the expansion of essentialinvestment.

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What is deficit financing? what role does it play in the economic development

deficit financing and economic development

Thus, deficit financing becomes anti-developmental in the long run. This is because of certain rigidities in the effort to increase the output. If we grow the economy each year over the next five years, there is every possibility of achieving double-digit growth. This can be arranged for in different ways. Utilized and underutilized resources can be build up with the help of this policy. Thus, social injustice becomes prominent.

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Deficit financing is an important source of investment for economic development

deficit financing and economic development

Most of developing countries are also using these weapons against the inflationary pressure to reduce the inflation. Lewis visualizes a three stage impact of deficit financing in an economy. Monetary Policy :- An effective monitory policy can be adopted to reduce the inflationary pressure. Political pressure also acts as a factor influencing the level of tax tolerance in the economy. In India the term deficit financing is used in a different sense.

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What is deficit financing

deficit financing and economic development

Hence, the government should carefully monitor the growth rate of real income. So a large number of people who are engaged with these industries becomes unemployed. In other words, there are various purposes of deficit financing. But undue reliance on deficit financing is certainly harmful. While for the development of any country there is need of a huge amount of capital.

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What role do deficit financing performs in economic development?

deficit financing and economic development

In other words, income inequality increases. In order to achieve its planned economic growth target, the Federal Government will need to be mindful of the quality of its expenditure, renowned professor of economics, Paul Collier, has advised. A 100% rise in the money supply may create only 10% rise in the price of the commodity. The magnitude of government fiscal surplus or deficit is probably one of the most important statistics used to measure the impact of government fiscal policy on the economy. Lack of Banking Facilities :- Savings are mobilized by the financing institutions.

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What role do deficit financing performs in economic development?

deficit financing and economic development

Deficit financing and income distri­bution. If it is used without any safeguard it may generate evil consequence in the economy. Therefore in the economies of the world, deficit financing is mainly resorted to attain the following objectives: 1. However, the issue of debt management in Nigeria has continued to produce intense debate over the years. Increase in Exports :- By increasing the exported, government can earn foreign exchange which can be used on the import of capital goods. We will not compromise some basic macro economic indicators as a way of achieving macro economic stability. Over the years, there has been a persistent rise in private consumption expenditures and developments in the external sector have also impacted strongly on the budget deficit.

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Economic Impacts of Deficit Financing

deficit financing and economic development

The idea that inflation will be self-destroying is based on the assumption that the extra money income created by deficit financing will become stabilised at a certain level, so that after a time-lag, the extra output of consumer goods which results from the new capital goods can catch up with it. The Medici family was the wealthiest family in Florence. Proper Allocation Of Resources :- The rise in price due to deficit financing can be controlled by proper allocation of resources. Summing up, the use of deficit financing for economic development may be likened to firewhich if unregulated produces havoc, while regulated, it gives light and warmth. Following are the important sources of capital formation : 1. Seeing more profits, producers would be encouraged to reinvest their savings and accumulated profits.

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Deficit financing is an important source of investment for economic development

deficit financing and economic development

Suspension of Foreign Aid :- Due to delay ans suspension of foreign aid Govt. However, all types of deficit expenditure, not necessarily tend to disturb existing social justice. Expansionary Deficit financing is always expansionary in its effects. The basic source of capital formation is savings. The studio bears the difference between production costs and licensing fees, but recoups significantly more money if the show is sold in syndication. The inflationary pressure generated by deficit financingcan also be reduced by having an effective control on the supply and prices of essentialcommodities.

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Economic Impacts of Deficit Financing

deficit financing and economic development

Thus, deficit financing which leads to a moderate price rise is perfectly justifiable. It is understood as the excess of current expenditure over current revenue which is financed either through public borrowing or the creation of new money by the government. Both these methods of financing the deficit would have the effect of expanding money supply held by the public. Anyway, additional money thus created fuels the inflationary fire. The low elasticity in the supply of essential goods and the rising aggregate expenditures result in high propensities to consume and low propensities to save. Thus, if inflation is kept within a reasonable level, deficit financing will promote economic development —thereby neutralizing the disadvantages of price rise. However, the enthusiasm which prompted the massive intervention of federal government in the 1970s began to fade in the 1980s when falling commodity prices in the world market resulted in drastic reduction in government earnings.

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